MICRO NOT MACRO – by Kay Mok Ku

I recently participated in a Southeast Asian investor panel organized by Momentum Works, where the main topic revolved around lessons learned from previous crises and how they can be applied to VC investing during the current pandemic.

As a venture investor who has experienced the global financial crisis (GFC) up close in Southeast Asia, I held the view that we are definitely in better shape during the current situation! This is because we did not even have an active VC market in Southeast Asia back in 2008. As Chua Boon Ping, CEO SPH Ventures, pointed out, the real casualty from GFC in Southeast Asia was the private equity funds.

The other view I hear often is that since the macro-economy is doing so badly, VC investments must be suffering. Unfortunately, I think many investors have confused VC funds with index funds. The latter track, and so rise and fall with the broader economy but VC funds are invested in a select group of upstarts that thrive on disruption, so microeconomics of firms is more relevant to their performance.

To test the hypothesis, I asked our monitoring team to provide an overall review of our active portfolio companies in ASEAN. Based on their analysis, about 55% of our companies have a runway of 1 year or more, and 80% have a runway of 6 months or more. What is more surprising, in terms of the valuation impact for 2020, they are expecting an upside of 9.6% and a potential downside of 8.6%. This seeming disconnect with the macro environment is mainly due to the winners covering up for the losers. Here are some characteristics of potential winners:

1. They are asset-light. VCs are invested in startups that are trying to use online technologies to disrupt traditional industries. As a result, their business models tend to be very asset light. For example, while we have invested in Property Tech companies, they have mostly structured their supply-side deals on a revenue sharing basis, so they are not saddled with high fixed costs when the market sours. This is unlike offline businesses such as restaurants which require rental rebates from landlords in order to survive this unexpected downturn.
2. They did not over-raise. In the boom days leading up to the pandemic, quite a number of startups became the “Chosen Ones” and raised outsized rounds from well-funded investors. While it is a testimonial to the compelling visions of these founders, such rounds can create potential hazards when companies start using investors’ capital to fund top line growth without regards to the underlying unit economics. On the other hand, startups which are on intermittent capital fasting, are lean and mean and seem to have stronger fighting spirit as they do not have to deal with morale fallout from retrenchment, which inevitably happens when rubbery visions meet the road.
3. They have diversity in their business model. Disruption kills traditional businesses because they are often built on a single, stable business model. Just look at the airlines industry. On the other hand, startups are born in the riverbed of volatile early adopter markets, so they are used to navigating developmental rapids. In this downturn, I have seen the more nimble startups diversifying from online recruiting to education, from daily rentals (targeting tourists) to monthly ones (serving local population), from app advertising to publishing (getting a cut of booming gaming revenues).

 
So my advice to startups is to ignore the macro doom and focus on the micro boom. Besides cost cutting to ensure you are a survivor, it is also important to look out for new normal opportunities that you can capitalize on so that you can emerge from this crisis as a winner!

PS: Credit to Zuain and her amazing monitoring team for providing the wonderful analysis that made this article possible!